Jeremy Hunt takes the tax burden to post-war high

Jeremy Hunt has just announced the most austere fiscal statement since 2010. The Chancellor’s plan to plug the £55 billion black hole in public finances will be achieved with £25 billion in tax hikes and £30 billion worth of spending cuts by 2027-8, taking the tax burden to a post-war high.

The economic forecast from the Office for Budget Responsibility suggests the UK is already in a recession, echoing the Bank of England’s predictions for a shallow yet long downturn. The OBR’s forecasts are slightly more optimistic, showing five consecutive quarters of negative growth compared with the Bank’s eight. Still, the OBR’s predictions show the UK experiencing the sharpest economic contraction in Europe next year.

Inflation is expected to remain more than triple the Bank’s target next year, averaging 7.4 per cent. As price hikes eat away at savings, wages are taking a substantial hit, too. The OBR estimates we are now looking at the biggest fall in living standards in post-war history.

It is within the context of this grim economic outlook that Hunt announced his taxation and spending announcements, which came alongside two new fiscal rules: ‘the first is that underlying debt must fall as a percentage of GDP by the fifth year of a rolling five-year period,’ and, secondly, ‘that public sector borrowing over the same period must be below 3 per cent of GDP’. The hikes, cuts, and new rules are all designed to get the markets back on side after the disastrous fallout from Liz Truss and Kwasi Kwarteng’s mini-Budget in September. Hunt emphasised that these tough decisions will mean that inflation and interest rates end up significantly lower. But with today’s announcements, debt interest payments are estimated to hit £120 billion a year – double last year’s payments and more than half of the NHS’s yearly budget. (However, no new beds or treatments are bought with this money; it’s simply paying off the interest on money already borrowed.) According to the Institute for Fiscal Studies, the government will spend more on servicing its debt this year than it will on any other public service – bar the NHS.

After the numerous surprises in the Truss-Kwarteng mini-Budget landed so badly with the markets, Hunt and Sunak took the opposite approach, offering up no rabbits. Hunt has, in large part, extended the tax-raising policies Sunak ushered in as chancellor. The freeze on income tax thresholds, as well as national insurance and inheritance tax thresholds, has been extended to 2028, expected to raise £26 billion. This ultimate stealth tax is expected to drag more than 1.5 million people into the 40p or higher tax rate. The ‘energy profits levy’ is also being used to grow the Treasury’s coffers by £14 billion by increasing the windfall tax on oil and gas companies from a 25 per cent levy to a 35 per cent levy until March 2028 and introducing a 45 per cent levy on ‘energy generators’.

In a full rejection of Truss’s plan to abolish the 45p tax rate, Hunt is pulling more workers into it. The threshold at which workers will pay the top rate of tax is being lowered to £125,140, down from £150,000 – increasing taxes of those earning more than £150,000 by £1,200 a year. Other thresholds are coming down, too. The dividend allowance will fall from £2,000 to £1,000 next year, then to £500 from April 2024. The Annual Exempt Amount for capital gains tax will be more than halved next year, from £12,300 to £6,000 next year – and then again, down to £3,000 from spring 2024. The increases in stamp duty thresholds announced by Kwarteng and kept by Hunt will see a sunset clause on 31 March 2025.

On the spending side, Hunt kept commitments outlined in last year’s comprehensive spending review. This means departments are facing real-terms cuts due to inflation. Public sector spending will still grow in real terms, but at a slower rate of 1 per cent. He did not take this consolidation opportunity to cut capital spending, with £100 billion projects such as HS2 still on the books. While the budget won’t grow as planned, Hunt noted that capital spending will ‘still increase from £63 billion four years ago to £114 billion next year and £115 billion the year after – and remain at that level, more than double what it was under the last Labour government’.

The giveaways were targeted in areas expected to be exempt from spending cuts – £3.3 billion extra for the NHS over the next two years, to fill the inflation gap flagged by the NHS chief – and areas Rishi Sunak has made clear in the past (primarily through his Mais lecture) that he thinks are vital to improving productivity and growth in the UK. This includes an additional £2.3 billion per year for the education budget (rejecting calls to add VAT to independent school bills, which he said would end up forcing 90,000 private pupils into the state sector). Hunt also confirmed an increase in public funding for R&D to £20 billion by 2024-5. The only area that was touted to get a funding boost but didn’t was defence, which Hunt says is under review for the next Budget. He said this is to allow more time to take into account developments in Ukraine but said funding will stay at a minimum level of 2 per cent of GDP so the UK meets its Nato commitment. 

The big risk of this Autumn Statement is that the financial pain becomes too much to bear, which made support packages for the vulnerable a vital part of how today’s announcements were sold. No surprise here: they’re rather generous. Hunt is replacing the Energy Price Guarantee with a more generous support package for average households, while removing the universal element to it. Under plans from April next year, the average household will see support worth up to £3,000 with roughly £500 worth of support for every household – leaving richer Britons to pay much of their own way.

There are other support packages for the most vulnerable, including additional cost of living payments next year: £900 for households on means-tested benefits; £300 for pensioner households; and £150 for those on disability benefits. But the two big, albeit expected, uplifts were to benefits and the state pension triple lock, both of which will rise in line with inflation.

This Autumn Statement is a serious wake-up call about just how much successive governments have pledged to fund and what kind of funding that actually requires. With the era of cheap borrowing coming to an end, the squeeze in every tax bracket is a reminder that such big promises require everyone to pay for them.

As I write in this week’s magazine, Sunak’s time in No. 11 suggests he is well aware of the need for reform: he knows that simply throwing more money at failing services guarantees further tax rises. But today’s statement pushes those decisions into the future, focusing more heavily on getting the government’s fiscal rules back on track. On that measure they have succeed – but it’s come at an extremely high price.